Just about anyone who has dealt with a 401(k) plan – either as a plan sponsor or a service provider – for any amount of time has had to deal with the issue of participants not timely cashing plan distribution checks. There are all sorts of potential concerns that range from tax implications to fiduciary responsibilities, but neither the IRS nor the DOL have been especially forthcoming with guidance.
That changed yesterday…sort of…when the IRS published Revenue Ruling 2019-19 that touches on some of the tax-related questions that come can come up. We say “sort of” because this ruling has very minimal impact on what we already knew.
What are the Issues?
The IRS addresses three questions in the ruling, all centering around whether a participant’s delay in cashing a distribution check until a subsequent year has any impact on when the distribution is taxable. Here are the three questions:
- If the participant does not cash the distribution check in the year it is paid, can the participant disregard the distribution amount from his/her gross income for that tax year?
- Does the failure to cash the check alter the employer’s/plan’s tax-withholding obligations?
- Does the failure to cash the check alter the employer’s/plan’s obligations to report the distribution on Form 1099-R for the year the of issuance?
Getting Down to Brass Tacks
In a word, the answer to all three questions is a resounding “no.” The ruling provides that if the check is issued to the participant during 2019, those dollars are included in gross compensation, taxable, and reported on Form 1099-R for the 2019 tax year. When the check is actually cashed has no impact on any of these issues. And what’s fantastic is it took the IRS five pages to tell us that.
So, as we mentioned earlier, there isn’t much to this particular ruling, but we can cross our fingers that it is an initial foray into providing additional guidance on other matters related to uncashed checks.